A joint venture is a commercial arrangement between two or more parties who agree to co-operate to achieve a particular objective that is hopefully mutually beneficial. Joint ventures cover a wide range of collaborative business arrangements which involve varying levels of integration by the parties concerned and which may be for a fixed or indefinite duration. There are a number of different types of joint venture depending upon the circumstances of the parties involved and also upon what is the ultimate aim of the arrangement. There are a number of reasons why contractors may seek to enter a joint venture. In some cases, this is a commercial decision, as it allows a contractor to share the risk and to increase its buying capacity, either with respect to a particular project or more generally. In other circumstances, this is a necessity, where contractors with particular skills or experience need to seek partners with a different skill set in order to demonstrate the breadth of experience specified in tender documents, or where local law requirements specify that contracting entities must have a certain amount of local representation. In this article, joint venture agreement for construction, we take a look at the process and the options open to you.
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What Is A Joint Venture (JV)?
There are many reasons why businesses decide to create a JV and they can be created in a variety of forms, but an often encountered structure is where you agree with another company to share legal ownership and contribute resources to pursue business opportunities together. You could buy into the other company, or you might agree to create a brand-new, shared company. In both instances, the new business will be jointly legally owned.
Different types of joint venture
It should be noted that there is no distinct legal form for a joint venture in the UK. Essentially, the structure of the JV will take the form which is best suited to its own circumstances and specific purpose for the benefit of the parties involved.
The way you structure a joint venture depends upon what you are trying to achieve.
One method, known as limited cooperation, is where one party agrees to co-operate with another business in a limited and defined way. For example, a start-up tech company with a fantastic new gadget might want to sell it through a larger company’s distribution network. The two partners could agree to a contract setting out the terms and conditions of how this would work.
Alternatively, you might want to set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree on how it should be managed. The key features of a structure like this are that the JV is a separate legal entity with limited liability and public filings of its accounts.
In some circumstances, other options may work better than a business corporation. For example, you could form a business partnership. You might even decide to completely merge your two businesses. The key features of a limited liability partnership structure is that JV is a separate legal entity with limited liability and public filings of its accounts.
To help you decide what form of joint venture is best for you, you should consider whether you want to be involved in managing it. You should also think about what might happen if the venture goes wrong and how much risk you are prepared to accept.
It is important to take expert legal advice when considering what the best option is for your JV structure. The manner in which you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong. You need a clear legal agreement setting out how the joint venture will work and how any income will be shared.
What are the main considerations of a joint venture for construction?
There are a number of things to consider when creating a joint venture for a construction project. These can include:
Responsibilities of the parties
The JV partners will need to agree upon the extent of responsibility for their own share of the work. If both parties are acting as the main contractor for any contract awarded, they will be jointly and severally liable to the employer if anything goes wrong. Liability will then be apportioned as per the terms of the JV agreement.
What is the procedure for Tendering?
There will be a procedure for bringing tenders to the management board and for contract awards and then the running of those contracts. The resources to be brought to each contract will be decided by the management board including the appointment of a project manager to run each joint venture project.
What are the management considerations for the JV?
A management board with representatives from each party will need to be created. The purpose of the board is to evaluate projects, decide on tenders and contracts as well as meeting regularly to review progress and deal with issues. There will usually be equal voting rights for all participants at management meetings. The chairman may or may not have a casting vote.
Arranging finance
How is the JV going to be funded? Are the parties going to split the funding equally or will one party put more money into the venture than the other? It could be the case that one party provides all the funds and the other party brings knowledge, expertise and experience to the table. Will personal guarantees need to be provided? However the finance is to be arranged, it is important that all parties are clear from the start what their obligations are. The need for working capital and the way in which payments from clients will be handled and distributed will be laid down in the JV agreement. Regular management accounts will also need to be prepared.
What Are The Advantages Of A Joint Venture (JV)?
If you have partnered with an appropriate business, they will offer you access to an immediate source of customers, a great source of experienced and knowledgeable employees, ready-made and hopefully streamlined distribution channels and a wealth of knowledge of the market.
You can use the goodwill of your partner’s brand to gain instant market credibility and as such have a level playing field with competitors. Additionally, your partner may bring new products or manufacturing capabilities. In established markets where competition is high, a JV may well prove to be the only practical way to gain entry to this marketplace.
A Joint Venture is also far less costly than trying to buy an existing business and the structure offers a degree of flexibility if the prevailing market conditions change or if the partnership or the market actually proves to be less attractive than first thought. Further, it may be possible to sell back your interest in the JV to your partner which can cost less than writing off the cost of an acquisition or trying to close down a new office.
Sometimes the venture into a new market proves so successful that additional investment is attractive. Many JVs allow for outright purchase after a specified time period.
What are the disadvantages of a Joint Venture (JV)?
Establishing the right level of control can prove to be problematic. With insufficient oversight, the company will flounder, possibly damaging your reputation and also affecting the strategic direction of the business. If there is too much control, creativity can be stifled and frustrations and resentment can creep in.
Joint Venture structures aren’t always robust. Disagreements between the two parties can often arise regarding levels of control, operations and direction. Sometimes things can get lost in translation as cultural differences in how business is handled can surface. If disagreements about various business considerations arise, who has the ultimate say on how to settle things?
Due to these perceived disadvantages, some joint ventures can often be quite short-lived. As a result, being aware of the parting of ways right at the beginning is a wise move. Any shared technology and know-how with your partner can result in a strong competitor when the JV dissolves, particularly in countries with weak intellectual property protection.
How we can help
We have a proven track-record of helping clients set up joint ventures for construction. There can be an array of issues to take into consideration including employment, tax, financial, compliance and ensuring termination and possible acquisition clauses are drafted correctly. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner and support and advise you with all the negotiations. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a joint venture. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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